Assignment

Topics: Supply and demand, Economic surplus, Price elasticity of demand Pages: 18 (3880 words) Published: April 24, 2015
Chapter-6: Problems & Applications: 2, 4, 8
QUESTION 2
The government has decided that the free-market price of cheese is too low.

a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

b. Producers of cheese complain that the price floor has reduced their total revenue. Is this possible? Explain.

c. In response to cheese producers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

Answer
a. The imposition of a binding price floor in the cheese market is shown in Figure below. In the absence of the price floor, the price would be P1 and the quantity would be Q1. With the floor set at Pf, which is greater than P1, the quantity demanded is Q2, while quantity supplied is Q3, so there is a surplus of cheese in the amount Q3 – Q2.

b. The farmers’ complaint that their total revenue has declined is correct if demand is elastic. With elastic demand, the percentage decline in quantity would exceed the percentage rise in price, so total revenue would decline.

c. If the government purchases all the surplus cheese at the price floor, producers benefit and taxpayers lose. Producers would produce quantity Q3 of cheese, and their total revenue would increase substantially. However, consumers would buy only quantity Q2 of cheese, so they are in the same position as before. Taxpayers lose because they would be financing the purchase of the surplus cheese through higher taxes.

QUESTION 4
Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer purchased. (In fact, both the federal and state governments impose beer taxes of some sort.)

a. Draw a supply-and-demand diagram of the market for beer without the tax. Show the price paid by consumers, the price received by producers, and the quantity of beer sold. What is the difference between the price paid by consumers and the price received by producers?

b. b. Now draw a supply-and-demand diagram for the beer market with the tax. Show the price paid by consumers, the price received by producers, and the quantity of beer sold. What is the difference between the price paid by consumers and the price received by producers? Has the quantity of beer sold increased or decreased? c.

Answer
a) Figure below shows the market for beer without the tax. The equilibrium price is P1 and the equilibrium quantity is Q1. The price paid by consumers is the same as the price received by producers.

b) When the tax is imposed, it drives a wedge of $2 between supply and demand, as shown in Figure below. The price paid by consumers is P2, while the price received by producers is P2– $2. The quantity of beer sold declines to Q2.

QUESTION 8
A case study in this chapter discusses the federal minimum-wage law. a) Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor. Using a supply-and-demand diagram of the market for unskilled labor, show the market wage, the number of workers who are employed, and the number of workers who are unemployed. Also show the total wage payments to unskilled workers.

b) Now suppose the secretary of labor proposes an increase in the minimum wage. What effect would this increase have on employment? Does the change in employment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither?

c) What effect would this increase in the minimum wage have on unemployment? Does the change in unemployment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither? Answer

a) Figure below shows the effects of the minimum wage. In the absence of the minimum wage, the market...
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